Welcome to the Croner Taxwise annual roundup of developments in VAT. We hope that you will find it a valuable resource. We know that one of the biggest challenges you face is how to keep pace with the vast number of legislative changes that happen every year. We hope that the detailed changes in this annual guide can help you to pinpoint which ones are most relevant for your clients and where you may need to take action.
We also take a look at what we can expect from 2017. We are expecting a negotiation period of at least 2 years before Brexit is completed and so immediate changes to the UK VAT regime are unlikely. However, the post Brexit position is expected to be extremely complex and the VAT consequences vast so we have summarised some of the potential implications for businesses to help your clients begin to prepare for these changes.
Revenue and Customs Brief 04 (2016): VAT MOSS – Simplifications for businesses trading below the VAT registration threshold
In this Brief HMRC announced two new measures to help UK businesses that are below the UK VAT registration threshold and registered for VAT MOSS. HMRC now allows small businesses to base their ‘customer location’ decision on a single piece of information, such as the billing address provided by the customer or information provided to them by their payment service provider. The second measure concerns whether or not some activities fall within the scope of the rules. There is no registration threshold on cross border supplies of services and businesses of all sizes fall within the scope of the changes. However, this only applies where supplies are made in the course of furtherance of business. If activity is carried out as a hobby (i.e. only on a minimal and occasional basis), HMRC has confirmed that it does not normally see this as a business activity for VAT purposes.
Revenue and Customs Brief 09 (2016): VAT treatment of conversions of non-residential buildings into dwellings under permitted development rights
Permitted Development Rights (PDRs) have been introduced to streamline the planning process by removing the need to obtain full statutory planning consent for certain property conversions.
Under the previous VAT rules, developers needed to demonstrate that statutory planning consent has been granted and that the construction was carried out in accordance with that consent in order to meet the conditions for zero-rating or reduced-rating. This also applies to claimants under the DIY house builders scheme.
In this Brief, HMRC clarifies the evidence required to demonstrate the construction work is lawful in order for the zero or reduced rate of VAT to apply. Such evidence includes written notification from the local planning authority advising the grant of prior approval or advising that prior approval is not required.
Revenue and Customs Brief 10 (2016): VAT- unjust enrichment: non-profit making sports clubs
The Court of Justice of the European Union (CJEU) found, in the case of Bridport and West Dorset Golf Club, that the UK had incorrectly sought to apply VAT to certain supplies made to visitors of non-profit making clubs. After that judgment HMRC then denied repayment of VAT on the basis the claimants would be unjustly enriched. A number of clubs challenged HMRC’s refusal to settle their claims and appealed to the First Tier Tribunal.
The view of the FTT was that the clubs would be unjustly enriched only in respect of 10% of any refund and that the clubs were entitled to a 90% refund of the VAT incorrectly paid. This Brief explains HMRC’s decision not to appeal the judgement and informs businesses that they have agreed to make refunds, subject to claims meeting the terms of VAT Information Sheet 01/15.
Revenue and Customs Brief 11 (2016): VAT and the transfer of a going concern
This Brief sets out HMRC’s position following the Upper Tribunal (UT) decision in Intelligent Managed Services Limited. This case concerned VAT groups and transfers of a going concern (TOGC). HMRC’s policy has been that where a member of a VAT group acquires a business and thereafter the only supplies made are to other VAT group members the acquisition cannot be treated as a TOGC. This is because all subsequent supplies would be treated as made to and by the same person and so the transferor’s business effectively ceases at the point of transfer. The UT disagreed with HMRC’s conclusion deciding that HMRC had taken the statutory fiction of VAT grouping too far. This Brief confirms that HMRC now accepts that a business transferred into a VAT group is a TOGC if:
- That company intends to continue to use the transferred assets to operate the same kind of business in providing services to other group members, and
- Those other group members use the services to make supplies outside of the group
As regards transfers from a group, HMRC have also changed their policy. Now where, were it not for the VAT grouping rules, a business exists, the normal TOGC rules apply to transfers out of a VAT group
Revenue and Customs Brief 13 (2016), ‘VAT – the liability treatment of a dwelling formed from more than one building’,
This brief explains the change in policy relating to the treatment of dwellings that have been formed from either the construction of new buildings, or from the conversion of non-residential buildings into a dwelling. HMRC now accepts that single dwellings can be formed from more than one building.
Revenue and Customs Brief 14(2016): VAT- deduction of VAT on pension fund management costs following CJEU decision in PPG
In 2013 the CJEU issued a judgment in the case of PPG Holdings which related to the recovery of VAT incurred by an employer on the costs of operating a defined benefit pension scheme. This Brief announces that the post-PPG transitional period, during which employers may continue to use the pre-PPG rules, has been extended to 31 December 2017. It also advises that businesses which have already made changes to their structure and/or contractual arrangements may continue with those arrangements, or can choose to revert back to the previous treatment during the transitional period. HMRC have acknowledged that it’s taken longer than they expected to reconcile the court decision with pension and financial service regulations, accounting rules and emerging case law. Towards the end of the period they have advised they will review the position again and consider if a further extension is necessary.
Revenue & Customs Brief 15/2016: VAT – use and enjoyment of insurance repair services
This Brief sets out new rules relating to the place of supply of insurance repair services. The place of supply of services between two businesses is generally where the customer belongs. In some cases, insurance companies have established offshore entities to receive repair services thus avoiding a UK VAT charge which, as an insurance company, they would be unable to reclaim as input tax.
To level the playing field, with effect from 1 October 2016, the supply of repair services carried out as the result of an insurance claim made to an insurer, or their agent, located outside the EU is covered by a new use and enjoyment provision. This means VAT is due where the service is consumed and VAT will be due on goods repaired for people living in the UK. UK repairers will therefore have to charge VAT to insurers or their agents that are based outside the EU.
Revenue and Customs Brief 16 (2016): treatment of VAT incurred on assets that are used by the business prior to VAT registration
HMRC has finally addressed the uncertainty regarding recovery of input tax on assets purchased prior to VAT registration. Historically HMRC’s position was that a fully taxable business was able to recover VAT in full on fixed assets purchased by that business within 4 years of the effective date of registration, providing those assets were still “on hand” and in use by the business.
There was no published change of policy, but following an update to the HMRC internal Input Tax Guidance Manual (VIT32000) which advised that a business was required to apportion the VAT claimable on assets purchased prior to registration, HMRC officers have been challenging businesses that have recovered the VAT on the asset purchases in full. This brief confirms that HMRC will accept corrections from businesses that have overpaid VAT by voluntarily reducing the amount of VAT claimed on the purchase of pre-registration assets or been forced to do so by HMRC via an assessment or a reduction to a repayment claim.
VAT: reverse domestic charge for telecommunications services
From 1 February 2016 UK businesses that provide wholesale telecommunication services to other UK businesses are not required to account for VAT on the transaction. Instead, the customer must account for VAT using the reverse-charge procedure.
The reverse charge will apply to the services of routing telephone calls and associated data (text, images) over landlines, mobile networks or the internet. It does not apply to non-wholesale supplies or to businesses not registered or not liable to be registered for VAT.
This is an anti-fraud measure which removes the opportunity for fraudsters to charge VAT and then go missing before paying it over to HMRC in Missing Trader Intra-Community (MTIC) fraud.
In The Courts
Bookit and NEC C-130/15 and C-607/14): These were separate cases but the issue in each case was almost identical. The NEC owns and manages locations for concerts and sport events. It sells tickets for these events on behalf of an organiser through its own ticketing system. It checks ticket availability, books tickets, and transfers customer payment details to merchant acquirers (and issuers). Once payment is accepted, authorisation codes are sent (via the merchant acquirer) to NEC. Bookit is a member of the Odeon Cinema group and arranges cinema ticket sales. It accepts payment by credit and debit card and, like NEC, charges a separate fee for its payment service.
In both of these cases the taxpayers argued that the fee charged to customers was consideration for an exempt supply of financial services. The CJEU disagreed and concluded that the taxpayers did not bring about a transfer of money but, simply, exchanged information which enabled a transfer to take place. This was not sufficient for the transaction to be regarded as a financial service. As a result, the card handling / payment processing fees were not exempt from VAT but were subject to VAT at the standard rate
Longridge on the Thames (UKUT 0504): The taxpayer is a registered charity that educates young people in water borne activities. It considered that construction work in relation to a new building should be zero-rated on the basis that the building was intended for use solely for relevant charitable purposes i.e. for non-economic activities. Although the charity charged fees it contended that it did so in pursuing its charitable objects, and that this was reflected by the fact that the courses and facilities were heavily subsidised by donation income received and by the time and skills provided to it by volunteers. HMRC disagreed, contending that the taxpayer was carrying out economic activities.
In a unanimous judgment the Court of Appeal held that in line with EU case law, there was a direct link between the supply of services made by the charity and the fees received. The activities were permanently and regularly carried out and so therefore amounted to an economic activity. This meant that the construction services received could not qualify for zero-rating.
Burton (UK0020): This case related to a DIY claim made by Mr Burton. Mr Burton built a house next to a lake in Nottinghamshire. He had been managing the lake as Park Hall Lake Fisheries since 2004, opening it to anglers on a day permit basis. In order to make a claim under the DIY scheme the dwelling must not be prohibited from separate use or disposal by the terms of any covenant, statutory planning consent or similar provision. Condition 4 of the planning consent contained a provision that: “The occupation of the dwelling shall be limited to a person solely or mainly employed or last employed in Park Hall Lake Fisheries or a widow or widower of such person or any resident dependants.” HMRC refused the claim on the basis that it did not meet the definition of a dwelling. Mr Burton successfully challenged this at the FTT which held that there was a difference between a limitation on occupancy and a prohibition. However, the UT reversed the decision and held that the condition was sufficiently mandatory and clear to amount to a prohibition.
Frank A Smart & Son Limited (UKUT 121): This case involved the purchase of Single Farm Payment Entitlement (SFPE) units. The taxpayer ran a farming business and purchased a tranche of SFPE units which entitled it to the payment of certain farming subsidies. The question to be resolved was whether the purchase of the SFPE units was a business expense which gave rise to an entitlement to reclaim the input VAT incurred. HMRC contended that there was not a sufficient link whereas the taxpayer contended that the money raised through the payment of Single Farm subsidy went to further the taxable farming activities of the business. The Upper Tribunal agreed with the FTT. There was a direct and immediate link between the VAT input (the purchase of the SFPE units) and the taxpayer’s taxable farming transactions which entitled the taxpayer to full recovery of the VAT incurred on the purchase of the units.
A Look Ahead To 2017
EC proposals for the digital single market
The European commission has published a series of proposed measures aimed at allowing consumers and companies to buy and sell goods and services more easily online.
The key aspects of the proposal are:
- New VAT rules for sales of goods and services on-line: This extends the existing MOSS registration system to goods and proposes a single quarterly return for both goods and services.
- Simplifying VAT rules for micro-businesses and start-ups. This includes a proposal for a €10,000 per year threshold for e-services under which VAT can be accounted for where the supplying business is established. A proposal for a €100,000 threshold under which only 1 piece of evidence for customer location is required to evidence where the customer is located (and where VAT is due). A simplification measure that a business can only be audited where the business is located.
- Action against VAT fraud from outside the EU: This includes the removal of the exemption for small imported consignments under €22, known in the UK as low value consignment relief.
- Equal rules for taxing e-books, e-newspapers and their printed equivalents: These proposals permit member states to apply the same rate of VAT to electronically supplied publication as they do to printed matter.
“Scope of VAT Grouping” Consultation
HMRC has issued a consultation on VAT grouping following the ECJ decisions in Larentia and Minerva and Marenave (C- 108/14 and C-109/14) and Skandia America Corporation (C-7/13).
- The UK has always restricted VAT groups to ‘bodies corporate’. In July 2015, the CJEU decision in Larentia & Minerva indicated that a member state may not restrict VAT grouping to those entities which have legal personality. The decision also indicated that member states have to extend VAT grouping to a wider range of entities that have close financial, economic and organisational links. HMRC is asking for views on the risks and opportunities for businesses if VAT grouping is widened to other entities, such as partnerships. HMRC are asking whether eligibility should be extended and what the new criteria should be.
- In the case of Skandia the CJEU found that Sweden’s ‘establishment only’ policy of excluding overseas branches from a VAT group was not contrary to the VAT directive, so that supplies from the overseas head office to its Swedish branch were taxable. HMRC has always treated the whole of a corporate entity including overseas establishments as being within a VAT group so that supplies between branches are disregarded. The consultation asks for views on how these changes have impacted business, both financially and operationally
- HMRC is also asking whether businesses have any views on the interaction between VAT grouping and the cost sharing exemption
Changes to the flat rate scheme & the introduction of limited cost traders
From 1 April 2017 flat rate scheme businesses must determine whether they meet the definition of a limited cost trader. Limited cost traders are defined as those whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)
Such traders will be required to apply a flat rate scheme percentage of 16.5%.
Excluded from the definition of goods are capital expenditure, food or drink for consumption by the flat rate business or its employees, vehicles, vehicle parts and fuel (except where the business is one that carries out transport services). These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.
Paying or invoicing in advance to avoid an increase in tax is known as forestalling. Anti-forestalling legislation has also been published to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017.
There is a great deal of uncertainty surrounding the form Brexit will take, and the impact on businesses but we suggest that you start pinpointing areas that could be affected such as:
Purchasing goods from the EU: Once the UK exits the EU purchases from other EU countries will become imports and import VAT and customs duty will need to be paid where appropriate (subject to any trade agreements). It will also be necessary for customs formalities to be met when the goods are imported into the UK which may result in an increased administrative burden and delays at the UK border.
Selling goods to the EU: UK businesses will be required to treat sales of goods to EU customers as exports and EU customers will be required to pay import VAT and customs duty when the goods are imported (although again this is subject to any trade agreements that are reached). This could make buying goods from UK suppliers less attractive not only because of the impact on cash flow but also because customers will have the additional administrative burden of customs documentation.
In addition, the UK may no longer to be able to take advantage of simplifications such as triangulation, supply and installation of goods and call off stock that currently exist within the EU if the EU country has not widened the scope of these simplifications to include non-EU countries. This could result in a requirement for UK businesses to register for VAT in other Member States when they have previously not been required to do so.
However, UK businesses will no longer be required to complete Intrastat returns for dispatches or EC Sales lists (although they will instead be expected to complete customs declarations) and businesses will no longer be required to check if the customer’s EU VAT number is correct before zero-rating a supply (subject to any trade agreements).
Distance selling: Unless businesses can take advantage of any low value consignment relief rules in order to import low value goods into an EU country UK businesses may need to register for VAT in the customer’s EU country if they wish to continue to sell goods to private consumers. This may result in increased costs and administration and as a consequence smaller businesses may decide to cease to trade internationally due to the additional burden of exporting goods.
Supplies of services: UK businesses may have to take into consideration the ‘use and enjoyment’ rules that relate to non-EU customers if certain types of services, such as broadcasting, telecoms and e-services, are used and enjoyed in the EU. More positively businesses who are registered for VAT under Mini One-Stop Shop (MOSS) will be able to continue to use the simplification but may need to switch to the non-union scheme. In addition, the travel sector will no longer be required to account for VAT using the Tour Operators Margin Scheme on EU travel. Although, it is likely that the UK government will decide on a different mechanism to ensure VAT is accounted for on these types of supplies
EU refund claims: Once the UK has left the EU, businesses may be required to use the paper based 13th Directive refund system which is much slower and where claims are more frequently challenged. UK businesses that incur substantial amounts of VAT within the EU may find it more difficult to claim EU VAT incurred.
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